Online Video Business Model Flawed, But Fixable

In this post, I will outline a mindset that hurts that industry, what the current business model is and why it doesn't work, a suggestion to ensure profitability, and the business model that can make an online video site profitable.

In their new September issue, Fast Company magazine features a fascinating story about the comedy web video business and how it's almost impossible to make these websites profitable. They lay out many of the current business models, but I think an addendum is useful.

First, The Mindset

We tend to think about web videos as a "thing." It is a product. It is content.

Forget this mindset. If you're a video producer, web video might be a tangible thing that comes from tangible people sitting around your tangible office. But it's not.

For your audience, web video is an experience. There's no actual product for the viewer - the video elevates the spirits or gives us hope or connects us to others. It has more in common with a trip to Disneyland than it does with buying razor blades.

So stop thinking of a video as a commodity and start thinking of it as an experience you provide for your viewer.

Second, The Model

As the Fast Company article points out, the prevailing business model is advertiser-based. This has been the case for most things in the U.S. for more than half a century.

However, the advertiser business model cannot support web video. Consider it: the marketplace is fragmented, niche sites have the most loyal visitors, online is still new to many advertisers, audience has a decreased appetite for ads, and the content (at least on the comedy sites) is oftentimes...edgy, to put it diplomatically.

Even off-shoots of the advertiser model don't work, such as product placement and sponsored shows. The huge conglomerates that have the money to invest in these small comedy sites only know these sorts of models - give the product away in exchange for some advertiser time.

No matter how many times you throw money at the problem, this business model still doesn't work.

But that doesn't mean web videos will never be profitable. (Misters Murdoch and Branson, please have your assistants print out the following explanation.)

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I agree and disagree. As someone in the online video space, the advertising business model CAN work, but should not be the only focus.

Yes it will be hard for niche sites to find advertisers on their own - but that is because advertisers look for eyeballs and scale.

Niche sites that get advertising placed as part of a broader coalition of sites - say for example a groups of online video sites that routinely reach 18 - 30 year olds - have a real chance at advertising revenue.

Individually each site could be pulling 200,000 uniques but combine 20 of those sites and you get an audience of 4 million and one central place for advertisers to make the purchase.

The professionalism of the content matters most. Web video tends to be crappy user-gen video and that won't attract advertising.

Sponsorships worked for Soap Operas and do work on the web. People will sit through sponsorship messages if the content is good.

Just look at Hulu.

Should you hang your hat on ads only? No, but...just to give an example:

If my site was generating 1 million uniques per month and only getting $15 cpm for video and accompanying banner ads and $6 cpm for banners.

MTV could acquire us and suddenly be charging $15 cpm for banner ads and $25 for video and accompanying banners.

That is because they have both a larger audience to sell to advertisers across the network AND they have the sales team to approach agencies.